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Tuesday, April 28,
2020 / 5:52 PM / by Moody's Investors Service / Header Image
Credit: MSCI
Moody's Investors Service says in a new report that
the covenant quality (CQ) score for emerging markets (EMs) improved slightly in
the six months ended 31 March 2020, but that the risk of cash leakage is rising
amid the coronavirus-led downturn.
"The average cash leakage score for EM bonds
weakened by 4% to 4.06 (weak) in the six months to March 2020, mainly because
of repeat Chinese property issuers predating their restricted payments income
baskets to coincide with those of their previous bond issuance," says Jake
Avayou, a Moody's Vice President and Senior Covenant Officer.
Consequently, half of the 28 full-package Chinese
property bonds received the weakest possible cash leakage score of 5.00.
"We did however see a slight overall improvement
in the CQ score to 3.25 (moderate) for the six months ended 31 March 2020, from
3.35 (moderate) for the previous six months, as the other five key risk scores
either improved or remained the same," adds Avayou.
Liens subordination scores improved the most,
strengthening by 10% to 2.57 (good), as a lower proportion of Chinese bonds
included credit facility debt carve-outs that can be secured under the
permitted liens carve-outs.
The average CQ score remains considerably stronger
than for non-EM EMEA and North American bonds issued in the same period in five
of the six risk areas that Moody's scores, except structural subordination.
Structural subordination remains a key area of weakness because of the lack of
guarantees from onshore operating subsidiaries for Chinese bonds, which
accounted for 70% of full-package EM bonds during the six months ended 31 March
2020.
Moody's scored 60 EM high-yield bonds during the six
months ended 31 March 2020, of which 46 were full-package and 14 were
high-yield lite.
Asian companies continued to dominate EM bond
issuance, accounting for 80% of issuance, with Chinese companies in turn accounting
for 63% of the Asian bonds. Latin America accounted for 13% of EM bond
issuance, and Emerging Europe for 7%. There were no bonds from Africa and the
Middle East in the six months ended 31 March 2020.
Moody's CQ score combines six factors: (1) cash
leakage, (2) risky investments, (3) leveraging, (4) liens subordination, (5)
structural subordination and (6) change of control. The average CQ score for EM
bonds from January 2011 through March 2020 is 2.93 (moderate).
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